an economics scrapbook

The face of the river, in time, became a wonderful book . . . which told its mind to me without reserve, delivering its most cherished secrets as clearly as if it had uttered them with a voice.
-- Mark Twain

Is anyone doing any holiday shopping yet? I can’t believe how empty the parking lots have been across the suburbs of Los Angeles lately. Perhaps we’ve all taken to the computer this year, finally. The deals and selection are certainly superior, and it sure beats driving through traffic and rain. But if empty parking lots are any indication of what holiday sales are doing, we’re sure to see some anemic numbers coming down the pipeline for the retail sector this Christmas shopping season.

I just heard on Marketplace yesterday that the economy has actually recovered more than anyone realizes. Apparently it has actually grown over the last five quarters and retail sales numbers are up to pre-recession levels. Wow, if that is indeed the case I have to ask where is this growth coming from and is it sustainable? I ask only because there has been no marked improvement in the job market, while the middle class continues to slowly slip further toward oblivion. So what’s been funding this new growth and manufacturing? Is it all the effect of stimulus money? Are the super rich going for broke with their holiday shopping this year? Consumer confidence is important in getting folks out and spending – and apparently confidence has grown as well – but I wonder how it can sustain the economy if people aren’t actually earning any more so they can act upon that confidence with integrity. Perhaps the weaker dollar since QE2 has increased sales and demand for American products abroad enough to compensate for our lack of purchasing power at home. I did read that sales are up on exports recently, but we’re talking about five quarters of growth here.

Christmas is coming, the geese are getting fat
Pleased to put five quarters in the old man’s hat
If you haven’t got five quarters a credit line will do
If you haven’t got a credit line then God bless you!

Back at the ranch, people are letting their home loans default and waiting to see what happens. They are paying no mortgage and no rent, and they are finding they’re able to stay put in their homes for months and even years for free without consequence. Newly established laws that allow for banks to be fined for failure to keep foreclosed properties up to snuff mean banks are just as happy to let defaulting borrowers keep their names on the paperwork as long as possible. Not to mention banks avoid any write downs those properties would require if they were to be officially reclaimed, which would blow their mark-to-make-believe accounting and force their failing hands at the ponzi poker table. Not to mention, also, banks are facing an unprecedented tsunami sized wave of foreclosures hitting their books, which they are entirely ill equipped and understaffed to handle processing and getting to market. Not to mention, in addition to that, there is nobody willing to buy most of the defaulting property even if it does get to market without improved job stability and major further reductions in price, especially with interest rates on the rise in the wake of the Fed’s latest economic injection. Not to mention, furthermore, pressure to slow the foreclosure process is mounting due to moratoriums being considered and in some cases implemented by the banking industry in response to the recent controversy over fraudulent and illegal practices concerning existing foreclosures. In other words, there is not much incentive for banks to push foreclosures through right now, so they just let people stay put.

On the other side of the equation strategic default is on the rise, where people who actually can afford to pay their mortgages are deciding not to for the financial advantage. In most cases these homeowners are underwater, where they owe more money on their property than it is worth because of deflating prices in the housing market. Interestingly, according to a new white paper coming out of the Philadelphia Federal Reserve, most homeowners deciding to default in this way are doing so on their primary mortgages while opting to keep payments current on their second liens. Rather than paying the first mortgage in order to reduce house payments and avoid foreclosure, a far larger percentage are opting to let their first mortgages go while keeping their second liens current in order to keep their Home Equity Lines Of Credit (HELOCs) available. On top of this, for some unknown reason banks are not punishing people who default on their first mortgages by limiting their access to home equity credit. People are basically being allowed to keep access to lines of credit that are based on imaginary wealth, and they are doing just that in order to use that credit to buy more stuff. This wealth is imaginary first because the equity collateral supporting these home lines of credit is either nonexistent or diminishing while credit limits remain unaffected, and secondly because the risk attached to the defaulting of these borrowers is not reflected in the availability of credit (in fact, in 3 to 6% of cases HELOC limits have actually been raised despite default). These lines of credit represent claims to wealth that cannot be accounted for. Eventually someone in the chain of consumption will be left with no chair when the music stops playing. Someone will take the loss. If history is any indication of what lies ahead, it will most likely be the US taxpayer who’s left with any unpaid bills… that is to say, the people of the middle class. So the insanity of housing bubble finance lives on.

I would venture to say consumption continues to find considerable funding from deterred housing costs. Essentially, millions of people are living for free and using those diverted dollars as disposable income. Many are funding their spending with HELOCs that have no viable collateral behind them. This boosts consumer spending and gives the appearance of growth, but it is definitely not a sustainable recovery. The denial is astounding here. Denial is a symptom of any addiction, and we are addicted to consuming. Our capitalist culture relies upon it. You can call it “retail therapy,” or an American “birthright,” or you can just “shop till you drop.” We in the U.S. are chasing the dragon of accumulating bigger, better, faster and more. We were saving our pennies for a while there, but we have begun to show some slack in that effort. We are back to spending and running up credit when there has been no increase in real wealth to base it on. For some of us without income it is a survival strategy. Many of us are still jonesing to keep up with the Jones’s and we just can’t seem to put the brakes on it. I do think there is a long term shift in consumption underway, but this sort of large scale social change ebbs and flows in waves of contraction and not without a good deal of resistance. However, spending what we do not have is a game that cannot continue for long at this point. It’s tough to do without, but the well is running dry and when it does there will simply be no water left to drink. Denial allows us to postpone facing the truth of our circumstances, but fundamentally it does nothing to change them.

So, I’m pretty excited cause I’m fortunate enough to have had the means to do a little Christmas shopping this year and it was a lot of fun. I’m pretty much done actually, and just in time to enjoy having the kids home from school. It involved no credit card debt I couldn’t pay off in full when the bill arrived, and no home equity line of nothin’ (I’m a renter!). With the deflationary trend in toys, clothes, personal and household items going on these days there’s no reason that with a little effort you can’t buy fabulous quality and name brand gifts for a fraction of their original value. I managed to score some amazing discounts this year- and I’ve got two young children and no babysitter, so shopping doesn’t come easily nor does the time needed to do it. Now I can focus on the reason for the season – the Winter Solstice! Oh, and the Jesus story is lovely as well – the pure potential of that darling little baby ringing in the new. That little family had nothing but love and some borrowed hay to sleep on. No credit cards. No Home Equity Line of Credit. Not even a hotel room. ‘Tis the season less is more.